Regulation vs. the Market:
The Case of Bicycle Safety

Introduction

The debate on whether the market or government intervention in the market is the most
effective way to address particular social problems is as old as it is controversial.
Advocates on either side criticize the other approach and then declare their approach to
be preferable, often without examining their preferred approach's effectiveness. Seldom,
if ever, has anyone compared the approaches simultaneously and independently of one
another. This article does so, albeit on the narrow topic of bicycle safety. The market
approach to bicycle safety is represented by the development and marketing of the
hardshell bicycle helmet.(1) The intervention
approach is represented by the Consumer Product Safety Commission's (CPSC) bicycle
safety standard.(2) After this case study is presented,
lessons are drawn which contribute to the more general debate on whether allowing the
market to function or enacting government regulation is better for addressing perceived
problems.

It is appropriate to examine the CPSC here, because the agency itself was
formed out of this debate. In 1970, the President's Commission on Product Safety issued
its Final Report. It noted that twenty million Americans are injured, and 30,000 die,
annually as a result of incidents connected with consumer products. It estimated that the
annual cost of product-related injuries may exceed $5.5 billion.(3)
The chairman told Congress that an effective agency could prevent as many as four million
injuries and as many as 6,000 product related deaths each year.(4)

The Final Report was strongly criticized by Walter Oi.(5) He argued that the Commission's implicit goal of minimizing
aggregate costs of injuries related to products is inconsistent with the maximization of
consumer welfare. Rather, he suggested that the rational consumer would seek to minimize
the sum of accident costs and accident prevention costs. Thus, consumers occasionally
choose to purchase risky products even if there are less risky alternatives available. For
this reason, Oi strongly opposed any restriction on product choice through bans on unsafe
products or safety standards. Oi did admit that the market probably undersupplies safety
information and therefore there may be a role for the government in the provision or
subsidization of safety information.(6)

The debate continues well after the CPSC's creation, and its actions have fueled the
fires of both sides. Only three studies have examined the CPSC's effects on
across-the-board product safety. All three are limited because they examine only home
accident rates rather than consumer product injuries, and none control for effects from
products liability lawsuits. The first, released by the Consumer Federation of America,
examined household accidental deaths and injuries data collected by the National Safety
Council. It found that, for the nine years prior to the establishment of the CPSC,
injuries fell 11% and deaths fell 13%. For the nine years after the CPSC, injuries fell
28% and deaths, 27%.(7) This study is flawed in several
respects: it fails to account for other factors that may account for these trends; it does
not analyze the statistical significance of the results; and it
measures household injuries and deaths rather than product related injuries and deaths. In
contrast, a CPSC study found that product related injuries had increased 44% in its first
five years of operation.(8)

Kip Viscusi attempted to correct these flaws by performing a multivariate statistical
analysis using a simple lagged linear model of factors likely to affect the overall home
accident rate as reported by the National Center for Health Statistics. He found that the
CPSC dummy variable was not statistically significant, and the largest coefficient he
obtained for that variable indicated that the CPSC had only a 4% reduction in the injury
rate. He found only two variables to be statistically significant: real per capita
consumption and the lagged home accident rate.(9)

Viscusi's study was criticized by Zick, Mayer and Snow.(l0)
They disagreed with his formulation of a linear model and instead proposed an exponential
model that would allow for the effects of the CPSC to increase over time. They also
included the unemployment rate to control for certainty of income and two measures of
population age: those under 14 and those over 64.(11) In
contrast, Viscusi controlled only for persons under five.

Zick et al. performed regression analysis on the natural log of their exponential
function and found a statistically significant relationship that explained 86% of the
total variance.(12) While the unemployment rate and the proportion of population over 64 were not statistically
significant, the other variables, income (which they assert is comparable to Viscusi's
consumption variable), proportion of the population under age 14 and the CPSC were
statistically significant. The authors conclude that over the 1973-82 period, CPSC
accounted for saving an estimated 17,941 lives or about 7% of the deaths caused by home
accidents during that time period.(13) Thus, Viscusi and
Zick et al. agree that CPSC has not yet achieved its goal of a 20% reduction in injuries
and deaths, but they disagree on whether it has had any significant effect.

There are two interesting differences between these two studies in addition to those
discussed above. Viscusi used the national home accident rate as the dependent variable
and analyzed data from 1933 through 1981 and 1949 through 1981. He used the lagged home
accident rate as an independent variable to avoid serial correlation problems.(14) In contrast, Zick et al. found that national time series
data like that used in the other two studies resulted in multicollinearity problems with
their control variables. They therefore used accidental home death rates for ten randomly
selected states and dummy variables to control for differences between the states.(15) This is a rather unusual solution to multicollinearity.(16) It is not clear how state data solves the problem.

The second interesting difference is the formulation of the CPSC dummy variable.
Viscusi used a simple dummy variable which had a value of one from 1973 to 1981 and zero
prior to 1973.(17) Zick et al.felt that
CPSC effects would increase over time as consumers gradually replaced less safe products
with those satisfying CPSC standards. They therefore used an exponential dummy variable.
The variable had a value of one in 1973 and ten in 1982.(18)
It is far from clear that this relationship is the proper one to account for the CPSC's
increased effect over time, but their results are quite robust.

Other studies of the CPSC focus on particular rules. For example, Viscusi examines CPSC
rules on mattress flammability, child resistant caps, cribs, swimming pool slides, floor
coverings and bicycles. He also discusses cost-benefit analyses of CPSC rules on
matchbooks, architectural glazing, power lawn mowers, space heaters, and urea formaldehyde
foam insulation.(19) In contrast, other authors have praised
CPSC rules.(20) Lastly, some have criticized amendments to
the Consumer Product Safety Act that require the CPSC to rely on voluntary standards where
feasible.(21)

None of these analyses compare a CPSC safety standard with a corresponding market
effort to address the same problem with the possible exception of the
mattress flammability analysis. Linneman's analysis of the mattress flammability standard
noted that large mattress manufacturers had already reduced flammability by the time the
rule became effective. The result of the rule then was simply to force small manufacturers
out of business, resulting in only a marginal decrease in flammability.(22) Since the rule was under consideration for some time, it
is difficult to determine whether the market, without any suggestion of government
regulation, would have led to the same result.